J.C. Penney Company, Inc. (NYSE:JCP) 1Q13 EPS Review. The stock is only down 3% this morning to $18.20 a share on news that the company did not report even worse earnings. The stock is up about 25% since the new CEO Mike Ullman came in. Analysts at Citigroup have upgraded the stock from $15 to $20 a share based on new and higher estimates for 2015 EBITDA. Below is a summary of the report from Citi.
J.C. Penney Company, Inc. (JCP): Mike Ullman Sets the Course for JCP
Our Take — We are encouraged by the strategic plan outlined by newly-appointed CEO Mike Ullman. JCP will bring back private label in a major way (St. John’s Bay, Ambrielle, Made for Life, and JCP Home are being brought back), invest in depth of inventory to ensure in-stock availability, and utilize a “test and learn” approach for its marketing to find the best way to reconnect with core customers. In addition, fixing the J.C. Penney Company, Inc. (NYSE:JCP) Rewards loyalty program and the online business are key priorities. We expect these actions to drive SSS improvement, and we raised our 2013 SSS forecast to +0.2%, up from (-6.0)% previously, although we remain more cautious on operating margins. We reiterate our Neutral rating.
1Q13 EPS Missed Our Estimate — JCP reported 1Q13 adjusted (non-GAAP) EPS of (-$1.31), excluding the impact of restructuring and management transition charges ($72M pre-tax) and non-cash (primary) pension expense ($25M pre-tax). EPS were below our estimate of (-$0.67) and consensus of (-$0.89). J.C. Penney Company, Inc. (NYSE:JCP) previously reported 1Q13 SSS of (-16.6)%. Results reflected a gross margin decline of (-849) bps YOY (vs. our (-350) bps estimate), and SG&A expense deleverage of (-411) bps (vs. our (-50) bps estimate). Inventories declined (-9.3)% YOY, and J.C. Penney Company, Inc. (NYSE:JCP) ended the year with $821M in cash (an estimated cash burn of $960M in 1Q13).
Traffic Impressive Given SSS Decline — JCP’s (-16.6)% SSS decline in 1Q13 included a (-6)% decline in traffic, (-1)% decline in conversion, and (-10)% decline in average transaction value (due to higher clearance). We were most impressed with the sequential improvement in traffic, following a (-17)% traffic decline in 4Q12. Conversion also improved sequentially vs. a (-10)% decline in 4Q12.
Raising Target Price to $20 — We are raising our target price to $20, up from $15 previously. Our target is based on our 2015 EBITDA estimate of $1.03B (vs. $0.98B prev.) and a 6x target EV/EBITDA multiple (vs. 5x prev.). We believe that a higher multiple is justified given the opportunity to return to profitability as J.C. Penney Company, Inc. (NYSE:JCP) brings back core private label brands, increases promotional activity, and improves margins.
Merchandising: J.C. Penney Company, Inc. (NYSE:JCP) is focused on finding the right mix of private label, national brands, and attractions (i.e. shops). In the first quarter, national brands trended 20-30% better than private brands and represented a greater percentage of sales. JCP will be bringing back a number of private brands and will also offer a significantly expanded range of basics within its core brands. These are highermargin items that are expected to drive traffic and sales going forward.
Private Label: J.C. Penney Company, Inc. (NYSE:JCP) is bringing private label back in 2013 like it was in 2011, when private label represented over 50% of sales. Four key private brands are coming back, including St. John’s Bay (over $1B brand), Ambrielle (intimate apparel), Made for Life (women’s active line), and JCP Home. Private brands have been underemphasized over the past year. Lean inventories and out-ofstocks were significant headwinds for private label sales. JCP is focused on getting back into this business, which should resonate well with core customers.
Inventory: J.C. Penney Company, Inc. (NYSE:JCP) is investing in inventory to make sure that it has the right sizes and styles in-stock for customers. It has also started bringing St. John’s Bay back and expects inventory levels to be flattish YOY by the back half of the year.
Marketing: The most recent marketing better reflects the company’s efforts to reconnect with the customer and encourage them to return to J.C. Penney Company, Inc. (NYSE:JCP). Management also plans to deploy its marketing dollars more effectively to support the 20+ major shopping occasions during the year. This should result in a better return on marketing investments. The company experienced an encouraging response to its Mother’s Day marketing campaign.
Promotional Cadence: Promotional activity and marketing spend will be concentrated around the 20+ shopping occasions throughout the year. The company will combine strong sales with improved clarity of promotions.
Loyalty Program: Last year, J.C. Penney Company, Inc. (NYSE:JCP) went to a single-tier Rewards program. This year, the company will go back to a tiered Rewards program that will reward customers based on their level of spend.
Online Business: J.C. Penney Company, Inc. (NYSE:JCP) is focused on making jcp.com a stronger component of its business again. The online business lost $500M of sales in 2012, due primarily to in-stock issues, a higher penetration of home, and execution challenges. Management is aiming to create a seamless omnichannel experience with strong store and digital convergence.
Capex: Capex was $214M in 1Q13, lower than we had expected. However, accrued and unpaid capital expenditures were $335M at the end of the quarter. With the home launch beginning next month, 2013 capex is nearing completion.
Talent: JCP’s senior leadership team is intact, with especially strong teams in merchandising, planning and allocation, and stores. The company doesn’t anticipate making a large number of new hires, nor does it expect any further workforce reductions. It is focused on building bench strength.
Long-Term Profitability: Management doesn’t see a structural barrier to returning to historical sales productivity and margins. The core business remains intact. Management believes that it can return to a gross margin rate that is similar to the first three quarters of 2011 (prior to Ron Johnson becoming CEO).